Some of the domestic outsourcing companies may have almost got knocked down in the aftermath of the global economic meltdown, but they can’t be knocked out, for sure. If anything, they are now gearing themselves to fight back the ill-effects of the recessionary tendencies by constantly reinventing and upgrading themselves.

“You are doomed if you buy life-rings when a tsunami attacks you, but if you sell life-rings, you could cooperate well with others,” said Liu Jiren, chairman of Neusoft Corporation, the largest outsourcing company in the country. “We have never experienced spring, and the challenges we are faced with now, cannot be more difficult than 10 years, or 20 years ago,” said Liu.

Optimistic in long term

Fang Fahe, vice president of Neusoft, said: “In the short term, there will be a negative impact as vendors would cut costs, but in the long term, we are still optimistic since enterprises will pay more attention to cutting costs as the overall situation gets murkier.”

Fang believes that in the middle to longer term, there will still be plenty of opportunities for outsourcing enterprises.

According to a recent report from consulting firm Gartner, more companies would turn to outsourcing as they perceive it to be a faster, better, and cheaper business option in times of financial crisis.

“It is not that enterprises will stop spending money. They would only change the way they spend money. They want to save money,” said Zhang Yaqin, senior vice president, Microsoft, the largest vendor in the outsourcing industry in China. Zhang said if a company’s solution plan or services could meet such demands, its growth could still be vigorous.

He said Microsoft would increase, rather than cut, outsourcing to China. “We expect our business to grow in double digits this year,” said Zhang.

Microsoft would also increase its cooperation with Chinese outsourcing companies both in terms of technology and development. The company has spent over $100 million between July 2007 and June 2008, for its outsourcing business in China, with over 60 percent of the businesses being in software development and automatic testing sector.

The outsourcing lure in China has been helped by the blossoming domestic market and also because many multinationals prefer that option while setting up operations.

For Chinese outsourcing providers, this also means an opportunity.

“Many multinationals have planned to do so for a long time. They want to diversify the risks of outsourcing only to India, and get closer to the market because most of them have already had operations here,” said Peng Qiang, vice president of iSoftStone Information Service Corporation, another major outsourcing company.

Chen Lifeng, CEO of VanceInfo Technologies Inc, the first domestic outsourcing company listed in Nasdaq, said the financial crisis has also made many Fortune 500 enterprises get closer with their Chinese partners. Chen said he has got many invitations from multinationals recently to talk about business strategies in 2009, including big names like 3M, Cisco, and IBM.

“They invite us to talk about strategic cooperation. They hope they could transplant more business to China, and they put a high expectation on outsourcing manufacturers,” said Chen.

Unlike before, when multinationals only outsourced some lower end and unimportant business to Chinese companies, now, more enterprises have started to invite the Chinese outsourcing companies from the beginning, according to Chen.

For these outsourcing companies, opportunities can also come from within the country. The business can come from the large-scale infrastructure construction initiated by the government and the upgrade of domestic industry.

According to Liu of Neusoft, domestic companies would need outsourcing companies to help them improve productivity as they strive to stay competitive amid or after the crisis. “Many Chinese enterprises will die, and those who survive would definitely buy medicines to strengthen themselves,” said Liu. “They will have to improve their efficiency and this in turn would have a positive impact on IT industry development in China,” he said.

Peng of iSoftStone, on the other hand, sees the potential of the domestic market from industry upgrade. For instance, the banking sector in China used to be centered on accounting from the very beginning, but tailoring to the needs of client is its core business now. “They need to upgrade their system to compete with foreign banks,” said Peng, and the upgrade means hundreds of millions of investment for companies.

“We see more opportunities than challenges,” said Chen Yuhong, of Chinasoft International. Chen sees vast opportunities in sectors like railway transportation, agriculture, social welfare causes, and food security.

The crisis is also an opportunity for many of the outsourcing companies to rework their long-term strategies.

Liu of Neusoft sees more chances of roping in senior talent from abroad to strengthen his team. Neusoft plans to make more use of the overseas talent to expand its international business. The company has four offices in its main market, Japan, with 100 employees and intends to double this by the year-end, said Liu.

Survival of the fittest

Experts also see this a time of consolidation for the industry. There were only 112 software outsourcing companies in China in 2001, and the number has since soared to over 2,400 by last year. But most of them are small. An outsourcing company with over 1,000 employees is considered big in China, compared with companies of tens of thousands of employees in India.

“Some will have to die, and the rest will survive, grow up, and grow strong,” said Chen of Chinasoft. “For the past two years, the industry has seen a rapid increase, they need the time to settle down,” he said.

Industry insiders feel that Chinese outsourcing companies are now in the same situation that India was in 2000. According to Fang of Neusoft, China still has some advantages compared with India, where outsourcing is one of the core industries. For instance, labor costs in China though increasing are still 25 to 30 percent lower than that of India.

The country also has a large talent pool to choose from for its outsourcing sector. Statistically, China churns out some 600,000 undergraduate engineers annually compared to the 70,000 in the US and 350,000 in India. Better infrastructure like highways and telecommunication equipment along with support from the government could further benefit the outsourcing industry in China.

In fact, some Chinese companies have already started getting clients from their Indian counterparts, or even much larger opponents.

VanceInfo in 2007 got an offshore project of TIBCO, a US-based banking middleware company, from a major Indian outsourcer. The Indian outsourcing company could not meet TIBCO’s offshore project staffing needs in a timely manner, while the staff is more stable in China, said Ken Schulz, marketing director, VanceInfo. The TIBCO operations now employ over 200 in China.

Much of the credit for the success of the sector, however, lies with the government, which has pegged outsourcing as a major export sector after manufacturing. “The gross profit margin of service outsourcing is 40 percent, and that of manufacturing is 4 percent,” said Hong Gang, managing director of Gartner in China. The development of outsourcing industry has gained importance for the government as a way to increase employment without endangering the environment, particularly at a time when the manufacturing gets vulnerable to weakening global demand.

The government now sees service outsourcing as a major industry to garner more foreign investment. According to the 11th Five-Year Plan, the government plans to woo some 100 multinationals to transfer part of their service outsourcing industry to China by building 10 cities with international standards. The government also plans to help 1,000 Chinese outsourcing companies grow into medium to large size enterprises within the five-year period ending 2010.

The government’s goal is to double in five years the export value of the outsourcing industry by 2010, Jiang Zengwei, the vice commerce minister, said in an international service outsourcing expo in Chengdu in November 2008.

Despite the opportunities, the outsourcing industry still needs to overcome problems to stay ahead. According to Hong, the name recognition or recall value of outsourcing companies in China is still low compared with India. And it is difficult for vendors to differentiate companies form a variety of cities in China, as most of the second tier cities claim that they are the best outsourcing bases.

In addition, there is a massive pool of engineers and workers at the entry level, but not enough senior project managers. “We are in severe shortage in terms of workers, and you cannot get a good senior project manager simply by spending a lot of money. It takes time and experience,” said Hong.